4/8/12

Gas prices are on the rise again advancing almost 20 cents a
gallon from a month ago.Some states are
well above $4.00 a gallon including California, Illinois, New York, Maine,
Oregon, Washington and Alaska according to AAA.But what does this mean for the struggling economic recovery, and how
did prices get so high in the first place?While top economists argue over the complex issues, basic intuition can explain
a lot.

Increases in demand including the economic recovery, and
rising incomes around the world have increased pressures on crude oil and gas suppliers.Real GDP, business profits, and dividend
payouts have all increased in 2012 compared to last year’s numbers
(bea.gov).This means that firms and
households have more disposable income (even though it may not feel that way)
to spend on all goods including gas.Even though China’s growth has slowed, easing pressure on worldwide
gasoline demand, the US recovery has replaced their demand leading to the next
point – supply.

The supply of gasoline depends on two things, refining
capacity and crude oil inputs.The US is
actually the world’s largest exporter of gas.This is good news, but the U.S. Energy Information administration reports
that US refineries are currently refining 2.3% less than 6 months ago, and
operating capacity has also declined by 2.2%.The recent embargo on Iran’s crude oil supply sends a negative shock to
supply and will affect prices.Saudi
Arabia is doing their best to keep supplies high on the crude oil front, but we
face another issue when it comes to the refining process for gas.

High gas prices do not end at the pump either.Gas is an input in almost every production
process because of energy costs (gas based power plants) or
transportation.As costs rise, we can
expect prices of products to rise as well.The situation gets worse when we consider that summer is rapidly
approaching.Demand for gas tends to
spike during the summer months as families plan vacations and take long road
trips.While tapping into strategic oil
reserves can give temporary relief—and higher poll numbers—this action does not
solve the problem because reserves must be bought back again in the future,
possibly at a higher price.

There is some comfort in to be had in higher gas prices – it
creates an incentive to use less gas and motivates people develop alternative
sources.Until this happens, however, we
will be subject to the roller coaster ride of wild gas prices.